Those who find they are “real estate poor” can find themselves needing cash even though they may own several pieces of property, so they look into hard money equity loans for a quick fix of their financial problems. Those who have most of their cash tied up in real estate often require a quick loan but don’t wish to sell off their property just to get that fast hard money. The hard money industry has long been unregulated formally, either by state or federal laws. However some restrictions do apply (usury laws) when it comes to interest rates allowed on hard money equity loans.
Hard money mortgage lenders are often labeled as “creative real estate investors” due to the non traditional method by which they lend money or obtain real estate. They lend to what the industry considers less than ideal borrowers who have credit problems and may have had a bankruptcy or mortgage foreclosure in their past. Many of these borrowers have real estate in which their money is invested yet they do not wish to sell. If there is substantial equity in the property, a hard money lender may be interested in making a loan to that home owner. Interest rates are typically higher than the conventional rate and they are allowed to do this in most states and this is where usury laws come into effect. The term means interest charged that is above that allowed by law. This is where “creative investing or lending comes into play, and it is quite legal on hard money equity loans.
When a borrower wishes to take out a mortgage on their property the conventional way, they must have a good credit rating, substantial equity in their home, and agree to pay the loan off in a set period of time (usually fifteen to thirty years). In the case of hard money equity lenders, they can stipulate that the money loaned be paid back in a substantially shorter period of time, thus making payment much higher for the borrower. Add on higher rate of interest to that loan and the payments may be even higher.
But if the borrower can handle the steep payments, they can pay it back that much quicker and be done with the obligation. These short term loans can be called bridge financing. The typical hard money equity lenders make a profit on these transactions, but run the risk of losing their investment when borrowers default or they must be foreclosed on.